Tenant Improvement Scope: Who Pays for What Before You Sign
Tenant Improvement Scope: Who Pays for What Before You Sign
In a commercial buildout, the document that decides the most about your budget is not the construction contract. It's the lease work letter. That one or two pages define what the landlord delivers, what money you get, and where your own spending starts. A tenant improvement budget lives or dies on how clearly that split is written. The gaps in it — the items nobody claimed — become change orders after you've already signed and can't negotiate anything.
The short version
- The work letter, not the construction contract, sets your real out-of-pocket cost.
- Landlord work is usually the shell: base building, core systems brought to a point, sometimes an allowance.
- The tenant improvement allowance is a dollar figure. Everything past it is yours.
- Ask whether the allowance is paid up front or reimbursed after completion. That changes your cash flow, not just your budget.
- Undefined terms like "warm shell" are the most expensive words in a lease.
- The four usual gaps: rooftop HVAC unit, electrical service size, restroom rough-in, storefront.
- Have a contractor read the work letter against the actual space before you sign.
- Once the lease is signed, every unclaimed item is a tenant cost.
Who pays for what in a tenant improvement
Think of it as three buckets.
Landlord work. The base building and shell condition. Structure, roof, exterior walls, and core systems brought to some defined point — usually a stub or a panel, not a finished system. The landlord may also deliver restrooms, a sprinkler main, or a demised space, depending on the building and the deal.
Tenant improvement allowance. A dollar amount the landlord contributes to your work. It's often stated per square foot. Above that number, you pay.
Tenant work. Everything beyond the shell and above the allowance. Your walls, finishes, lighting, data, casework, equipment connections, and permits. Your contractor, your schedule, your budget. This is the scope covered in most tenant improvements projects.
| Item | Commonly landlord | Commonly tenant | Ask in writing |
|---|---|---|---|
| Roof, structure, exterior | Yes | No | Warranty terms |
| Rooftop HVAC unit | Sometimes | Sometimes | Who buys, who installs, who warranties |
| Distribution ductwork inside your space | No | Yes | Is any existing duct reusable |
| Electrical service size to the panel | Yes | No | Amps delivered vs. amps you need |
| Panel, branch wiring, lighting | No | Yes | Fixture allowance, if any |
| Restroom rough-in plumbing | Sometimes | Sometimes | Number of fixtures and ADA compliance |
| Storefront, doors, glass | Sometimes | Sometimes | Who pays if it needs replacing |
| Fire sprinkler main vs. heads | Landlord main | Tenant heads | Head count for your layout |
| Permits and drawings | No | Yes | Which drawings the landlord must approve |
Treat that table as a starting checklist, not a rule. There is no legal standard behind these terms.
Where the shell definitions get slippery
You'll see phrases like cold dark shell, warm shell, and vanilla box. None of them mean the same thing from one lease to the next. "Warm shell" in one deal means HVAC set and running. In the next it means a unit sitting on the roof with no duct, no thermostat, and no gas line. Both landlords will tell you they delivered a warm shell.
So don't accept the label. Make the lease list the items.
The most expensive item in your buildout is the one both sides assumed the other was paying for.
Where this goes wrong
- Signing first, pricing second. You lock a rent number, then find out the electrical service won't carry your equipment. Now the upgrade is a tenant cost and it wasn't in your budget.
- Treating the allowance as the budget. The allowance is a contribution. Your scope is set by what your operation needs, and it rarely lands on the same number.
- Missing the reimbursement condition. Some allowances pay only after final inspection, lien waivers, and a certificate of occupancy. You're funding the whole job first.
- Ignoring the approval clause. If the landlord has to approve your drawings and there's no response deadline, your schedule belongs to them. Ask for a set number of business days.
- Assuming existing equipment works. A rooftop unit that was running two years ago is not a delivered system. Get it inspected before you accept it as landlord work.
If you're mid-negotiation on a space right now, a contractor walk-through before signing costs you nothing and often finds five figures of hidden scope.
What to do before you sign
Walk the space with your contractor and the work letter in hand. Compare the written promise to what's actually there. Flag every gap in writing and push it back into lease negotiations while you still have leverage.
The items worth spending your negotiating energy on: electrical service size, HVAC tonnage and condition, restroom count and ADA compliance, and a landlord response deadline for drawing approvals. A restaurant buildout adds grease interceptor, gas service, and exhaust routing to that list. A warehouse conversion adds slab condition, dock equipment, and how much of the space you're allowed to office out.
This review is part of pre-construction, and it's the cheapest work in the whole project.
FAQ
What is a lease work letter?
It's the exhibit in a commercial lease that defines construction responsibilities. It states what condition the landlord delivers the space in, what money the landlord contributes, what the tenant builds, and who approves what. It's short, it's often overlooked, and it controls more of your budget than any other document you'll sign.
Who pays for a tenant improvement, the landlord or the tenant?
Both, usually. The landlord delivers the shell and often contributes an allowance. The tenant pays for everything beyond that — layout, finishes, lighting, data, equipment hookups, drawings, and permits. The split is whatever the work letter says it is, which is why the wording matters more than the norm.
Is the tenant improvement allowance negotiable?
Generally yes, along with rent, term length, and free rent. Landlords weigh allowance against lease length and your credit. A longer term usually buys a bigger allowance. Also negotiate how it's paid, because an allowance reimbursed at the end of the job is worth less to you than the same amount paid in draws.
Should I get a contractor involved before signing a lease?
Yes. A contractor reading the work letter against the actual space will find the items neither party claimed — service size, HVAC condition, restroom rough-in, storefront. Those items are negotiable before signature and a tenant expense after. It's the highest-value hour in the process.
How long does a tenant improvement take after the lease is signed?
It depends on drawings, permit review, and scope. Design and permitting often take longer than the construction itself. Commercial permit review timeline for City of Atlanta, DeKalb, Gwinnett, and Cobb typically take 2 weeks if everything is in order and they're playing nice. But budget in 4 weeks. Build your rent commencement date around the permit, not the hope.
Talk it through before you sign
If you have a space under consideration and a work letter in your inbox, get it read now. Call (404) 724-8709. On that call we'll ask what your operation needs, what the lease says the landlord delivers, and what condition the space is in today — about 15 minutes. From there we'll tell you which gaps to push back into negotiations, and whether the space is worth the buildout at all.